Sound Investing

The following are Dr. Pass’ note to his podcast:

This week we end 2025 with a Pediheart tradition - an episode on personal finance for medical professionals with noted authority on index investing and personal finance, Mr. Paul Merriman.

Paul is a retired investment advisor who now has a popular podcast "Sound Investing" and website in which he offers advice on investing for 'do it yourself' investors. In this week's episode, the 5th of his visits to Pediheart, Mr. Merriman discusses 'factor investing' via index-like ETF's and funds.

He also reviews who he believes might benefit from a financial advisor, what sort of advisor most should seek out and why he believes that many do not need one if they can 'stay the course'.

Resources mentioned in today's podcast are below. Wishing all a happy and healthy new year in 2026. 
Paul's website:
https://www.paulmerriman.com/#gsc.tab=0
'Best In Class' ETF's:
https://www.paulmerriman.com/Best-in-Class-ETF-Recommendations2025#gsc.tab=0
Sound Investing 'Quilt Charts':
https://irp.cdn-website.com/6b78c197/files/uploaded/(K)_Quilt_Charts_(1928-2024)_-_2024_Returns_(1).pdf
DFA 'Turn Out The Noise':
https://www.dimensional.com/film
As a reminder, all of the information provided in this week's episode should be considered entertainment and all financial decisions should be vetted with professionals or knowledgeable and trusted friends/family. 

In this episode, Paul shares the thinking behind what he believes may be one of the most important projects of his career—a project guided by a single goal:

That every investor who follows our work will know how to invest for the rest of their life.

To explain why that goal matters, Paul walks through the forks in the road every investor eventually faces—from betting on individual companies to owning entire markets, from chasing excitement to embracing simplicity.

Drawing on real experiences, including private investments that went to zero and one that unexpectedly turned into millions, Paul explains why diversification beats prediction, how a simple portfolio decision may quietly add about 1% a year over time, and why many academics draw a clear line between investing and speculation.

This episode isn’t about chasing returns.
It’s about building a plan you can live with—through good markets and bad—for the rest of your life.

If you’re looking for clarity, discipline, and a framework that helps you stay the course, this conversation is a powerful place to start.

Next week, I’ll be reviewing what we learned in 2025—and what those lessons may mean for 2026 and beyond.

Thank you, and happy holidays to you and your family.

Compounding Project Podcast – Episode 36

In Episode 36 of The Compounding Project Podcast, legendary investing educator Paul Merriman shares timeless insights on long-term investing, the power of compounding, and how everyday investors can build lasting wealth.

Paul explains why starting early is one of the most important financial decisions you can make, how compound growth works quietly over decades, and why low-cost index funds remain the foundation of successful investing strategies.

This episode dives deep into portfolio diversification, the hidden impact of investment fees, and the role of small-cap value investing in improving long-term returns. Paul also offers practical, evidence-based guidance for young investors, parents, late starters, and anyone seeking financial independence through disciplined investing.

Whether you’re new to investing or refining an existing portfolio, this conversation delivers actionable lessons on building wealth the smart way.

1. Starting early and staying consistent matters more than market timing or stock picking.

2. Low-cost index funds and diversification are the most reliable tools for long-term wealth building.

3. Small-cap value investing and minimizing fees can significantly increase lifetime investment returns.

• Your Money and Your Brain

• The Psychology of Money

• Thinking, Fast & Slow

• Spending Your Way to Wealth

Watch the full episode for expert insights on investing, compounding, and financial freedom.

Follow Paul Merriman On Social Media: ⤵︎📷 Instagram: /   / paulamerriman2012  📱 YouTube: /    / @paulmerrimansoundinvesting  To Know More,Follow Sathish Gajula On Social Media: ⤵︎ 📷 Instagram: /   / compoundingproject  📱 YouTube: /    / @compoundingproject  

Timestamps:

00:00 Episode Trailer

02:00 Intro to Wealth and Index Funds

03:20 The Million Dollar Decision

07:04 Investing Tips for Young Parents

12:47 Saving When Money Feels Tight

15:35 Stocks vs Bonds

19:58 Rethinking Stock Market Risk

24:36 Why Investing Is Easier Today

27:06 How Fees Hurt Returns

29:08 When Bonds Make Sense

32:56 Investing Across Generations

34:58 Portfolios by Age

35:52 Starting Late in Investing

41:05 Defensive Investing Basics

42:10 Why Stocks Matter Most

43:04 Beating the S&P 500

48:09 Market Returns Explained

51:22 Why Diversification Matters

54:49 Fees and Long-Term Returns

58:28 Small Cap Value vs Total Market

01:03:25 Equal-Weight S&P 500

01:08:36 Handling Market Volatility

01:11:05 Picking Small Cap Value Funds

01:12:50 Trust in Investing

01:16:42 Hotseat Questions

Over the last couple of weeks, I’ve been recording a series of Q&As that came out of a presentation I gave in November for the American Association of Individual Investors — AAII.

At the end of that nearly two-hour talk, I promised that I’d do a podcast answering every single question that came in. Well… there were 36 questions. That’s a little too much for one episode, so we broke them into three parts.

This is Part 3 — the final 12 questions. If you haven’t heard Parts 1 and 2 yet, we’ll link those in the show notes so you can catch up.

Before we jump in, I just want to say: I’m a huge fan of AAII. I started teaching their local chapters way back in 1984, and over the years I think I’ve presented to just about every chapter in the country — sometimes in person, sometimes by Zoom — but always to people who are genuinely committed to learning how investing works.

If you’ve never checked out AAII, I’ll include a link in the notes for a low-cost trial membership. Take a look around and see if it’s a resource that fits your investing journey.

Alright — let’s get to the last 12.

1. Will you develop strategies using the equal-weighted S&P 500? 01:44

2. Can you recommend advisors who follow your strategy? 07:20

3. Should I move mutual funds to ETFs in taxable accounts despite taxes? 11:26

4. With markets at highs, should I keep dollar-cost averaging or rebalance? 16:17

5. What portfolio fits 10 years to retire and 20–30 years of decumulation? 24:08

6. Will the configurator shift to only Avantis/DFA funds in 2026? 30:37

7. What does “inflation-adjusted fixed withdrawals” mean? 33:56

8. How should I invest an inheritance for kids/grandkids ages 2–45? 38:21

9. Ultimate Buy-and-Hold vs. two- or four-fund strategies — which is better? 49:03

10. Should political conditions change retirement portfolio decisions? 59:12

11. How do I find a fee-based/hourly advisor (Rhode Island question)? 1:05:56

12. Should very conservative 91-year-olds move beyond bonds and cash? 1:13:28

    
    

    Part 1 of the AAII Q&A Series 
    Part 2 of the AAII Q&A Series 
    AAII trial membership offer (the ~$2 first month deal)
    Boot Camp series hub 
    Fine-Tuning Your Asset Allocation table / lesson

    Sound Investing / portfolio decade return tables —
    Fixed vs. Variable Withdrawal episode/article 
    H-2A table referenced in Q9 
    Chris Pedersen Boot Camp presentation (Two-Fund for Life) 
    Garrett Planning Network advisor directory 
    HelloNectarine hourly advisor platform 
    PlanVision / Mark Zoril reference 
    

Paul continues his three-part series responding to questions from his November 8 AAII presentation. In this episode, he digs into risk-parity portfolios, the role of gold, how the 10-Fund Strategy compares to the S&P 500, growth vs. value, rebalancing discipline, and how to choose the right bond allocation in retirement. If you were at the AAII event, you’ll find the exact 12 questions listed below so you can jump straight to your topic.

12 AAII Questions Covered

1. Thoughts on risk-parity portfolios during retirement distributions? 2:12

2. Was the 10-Fund Strategy originally meant to mirror 60/40? 14:51

3. Should investors add gold (IAU) after its recent streak? 21:40

4. What is a double-rung bond ladder? 24:03

5. Which of the nine portfolios has the best return per unit of risk? 26:36

6. Analysis of growth funds outperforming over the last decade? 31:36

7. How to invest new money when the economic outlook looks uncertain? 36:40

8. Will the AAII slide deck be available? 38:54

9. How often do you rebalance? 39:25

10. How do you tune out the noise and stay the course? 41:13

11. How to choose your bond allocation in the distribution phase?  45:25

12. Can you share ETFs for the bond portion of a retirement portfolio? 52:12

Resources Mentioned

AAII presentation slides

10-Fund vs. S&P long-term comparison

Fine-Tuning Your Asset Allocation tables

Sound Investing tables

Retirement withdrawal tables

Lifetime Investment Strategy calculator

Best-in-Class ETF recommendations

Recorded from our new home on Bainbridge Island and released on Thanksgiving, this episode is equal parts gratitude and practical investing help. I open with my annual tradition of writing a fresh Thanksgiving list—people, communities, and institutions that have shaped my life and this work. I’m especially thankful for you, the DIY investors who keep showing up to learn, ask thoughtful questions, and hopefully staying the course.

I also share appreciation for the resources that support disciplined investing—Morningstar, the Bogleheads community, and the American Association of Individual Investors (AAII). After a recent AAII presentation (over 150 attendees), we ran out of time for a live Q&A. I promised to respond to every legitimate question, so this episode kicks off a multi-part series answering them in depth.

Here are the first 12 AAII questions covered in today’s episode:

1. (9:42) What alterations in portfolio construction do you recommend in transition from accumulation to distribution in order to maximize diversification of uncorrelated assets, safe withdrawal rates, and spending? ⁠Table h2a 
2. (21:21) I’m a huge fan of your U.S. two-fund portfolio. Why is diversification between large-cap growth and small-cap value so important, while diversification between VTSAX and AVUS (within the same asset class) is not? Should we diversify fund selection within the same asset class? Table K2b
3. (26:49) Have you considered creating a quilt chart for the Ultimate Buy-and-Hold portfolios with a 70/30 U.S./international split? Table K1a and H2a and H2b
4. (32:04) You appear to have avoided any mention of mid-cap. Should we be ignoring mid-cap funds?
5. (33:35) What do you think about adding alternative investments to the portfolio (for example, managed futures)?
6. (38:39) Are your recommendations for everyone, or does the game change when you have a pension for life?
7. (43:07) I was fighting with the Zoom link and arrived 25 minutes into the presentation. Will a video recording be available to participants?
8. (44:08) What would you expect the difference between the S&P 500 cap-weighted index (VFINX)and the S&P 500 equal-weighted index (VADAX)  to be?
9. (49:53) The four-fund portfolios are equal-weighted across their asset classes, which results in a value tilt overall. Why weigh them equally?
10. (54:35) One might think that adding international large-cap growth and international small-cap value to the two-fund approach would improve results. Does international allocation mainly reduce volatility/drawdown length, or also increase returns?  H2a and H2b
11. (56:26) Can you buy DFA and Avantis funds at Charles Schwab?
12. (58:40) What should you do if you have a lump sum to invest today, but current market highs make entry uncomfortable? https://awealthofcommonsense.com/2025/11/do-we-need-a-long-bear-market/
    

Paul Merriman brings 60+ years of investing experience to the Retire Today podcast, breaking down what really determines retirement success. Most investors think it’s about picking the right fund or timing the market—but Paul says the biggest threats aren’t headlines. They’re costs and emotions.

In the 1960s, investors routinely paid 8.5% to buy a mutual fund. Today fees are far lower, but the impact is still huge. Paul notes that even a 1% difference in expenses “can cost you about $3.5 million over a lifetime” because compounding works both for you and against you.

Behavior can cost even more. “When the market goes down, people panic,” Paul explains. Selling in a downturn—the “I just can’t take it anymore” moment—means locking in losses and missing the recovery. His advice: don’t time the market. Build a plan you can actually stick to.

When asked what separates retirees who thrive from those who struggle, Paul’s answer is simple: education. What you learn and who you learn it from shapes your decisions—and helps you stay calm when markets get rough. That’s why his nonprofit work focuses on teaching diversified, simple, low-cost strategies through guides like Sound Investing Portfolios and We’re Talking Millions!

Paul once promoted a 10-fund “Ultimate Buy-and-Hold” portfolio, but even John Bogle told him it was too complex. After testing simpler versions, Paul found that two-, four-, and six-fund portfolios often matched or beat the original. You can explore these models at PaulMerriman.com/portfolios. The takeaway: simplicity makes discipline easier.

We also discussed retirement withdrawals. Paul recommends a flexible approach: take a bit less after down years and a bit more when markets are strong. This can reduce stress and help your portfolio last. “If you know how long you’re likely to live and how much you have,” he says, “that knowledge gives you freedom—not fear.”

If you’re approaching retirement, here’s Paul’s short list:

• Diversify with low-cost index funds. Focus on the right mix, not the perfect pick.

• Match risk to reality. Choose a stock/bond split you can live with in bad markets.

• Use flexible withdrawals. Adjust spending based on market conditions.

• Keep behavior boring. Automate rebalancing and ignore predictions.

• Invest in education. Knowledge keeps emotions from running the show.

You’ve worked hard to build your savings. Now build a plan that works just as hard—quietly, efficiently, and with confidence. Watch the full conversation on YouTube for more on fees, behavior, portfolio design, and practical withdrawal strategies.

First, a big thank-you to everyone who joined me for the AAII presentation last Saturday. I appreciate your patience during my rocky Zoom start—and a special shout-out to Suzette Moskwa, who saved the day by running the slides!

As promised, I’m following up on your chat comments and questions from the session. This week’s focus is on your insights; in the next couple of weeks, I’ll share a full Q&A edition covering listener questions on portfolio construction, diversification, and long-term investing strategy.

Key Takeaways from This Week’s Discussion

1. ETFs vs. Mutual Funds — Tax Efficiency Matters
   Mutual funds often create higher annual taxes in taxable accounts. ETFs and index funds are more tax-efficient because of how they handle capital gains—saving investors up to 1% a year. Keep mutual funds inside IRAs to avoid unnecessary taxes.

2. Equal-Weighted vs. Cap-Weighted Portfolios
   The Invesco Equal Weighted S&P 500 (RSP) holds the same 500 companies as the standard index but gives each stock equal weight. This creates different exposure and more turnover, yet the ETF version reduces the tax drag—a key advantage for long-term investors.

3. Small-Cap Value Funds — Choosing the Right Fit
   VBR (Vanguard) performs best when large-cap growth leads, while AVUV and DFSV outperform when smaller value companies rise. The lesson: size and style matter in long-term returns.

4. The Power of Rebalancing & “Shannon’s Demon”
   Mentioned by Bill Yount from the Catching Up to FI podcast,  Shannon’s Demon illustrates how periodic rebalancing can turn volatility into profit. By selling high and buying low, you can enhance long-term performance while keeping risk in check.

5. Morningstar Ratings — Don’t Chase the Stars
   Star ratings mostly reflect recent trends, not future potential. Focus instead on the underlying asset class and decades of evidence, not last year’s winners.

6. Small-Cap Value Slump — Patience Pays Off
   Small-cap value has struggled this year, but historically it offers one of the best long-term premiums. Remember: asset class selection drives up to 99% of overall portfolio performance.

7. Risk Parity Portfolios — Balancing Risk the Smart Way
   Paul compared traditional diversification to risk parity, which balances exposure across stocks, bonds, and commodities. He prefers government bonds over commodities since bonds generate income and often rise when stocks fall.

8. Diversifying Within an Asset Class
   Instead of going “all or nothing,” you can hold multiple ETFs—like AVUV and DFSV—for extra balance within a category. Just keep the lineup manageable for your brokerage or platform.

9. Factor Investing — What Really Drives Returns
   The strongest long-term drivers are size and value. Momentum and quality can help, but smaller, cheaper companies historically deliver the best rewards.

10. Growth Funds & Ten-Year Performance
    Ten-year snapshots can mislead. From 2000 to 2025, small-cap value funds far outperformed growth and the S&P 500, showing the value premium remains powerful across full market cycles.

11. S&P 500 vs. Total Market — Nearly Identical Over Time
    Since 1928, returns differ by only 0.1%. The S&P’s recent edge comes mainly from a handful of mega-cap tech stocks, not fundamental differences in the indexes.

12. Hiring an Advisor — When It’s Worth It
    A skilled fiduciary advisor can help manage emotions, discipline, and rebalancing. If you struggle to stay consistent, professional guidance may be worth far more than the fee.

13. The DIY Investor Myth — Overcoming Human Biases
    “No one cares more about your money than you” sounds good, but behavioral biases—recency, overconfidence, and loss aversion—can derail results. Automation or a trusted advisor can protect you. For more insight, see Paul Hayes’ free book Spending Your Way to Wealth, especially the appendix on 48 investor biases.

Thank you again for your time, attention, and thoughtful participation. Despite the technical hiccups, your engagement made this an incredibly rewarding session!

In this episode, Paul dives into one of the most important themes in long-term investing: staying the course, even when individual asset classes deliver unexpected short-term results. Whether you’re a seasoned DIY investor or still building confidence, Paul shares timely lessons to help you make better decisions—and support others who rely on your guidance.

Paul also previews his upcoming presentation for the AAII Puget Sound Chapter, where he’ll take one of the deepest dives yet into Daryl Balls’ latest quilt charts, the Sound Investing portfolios, and the vital differences between traditional and non-traditional index funds.

You’ll hear Paul discuss insights from two of the industry’s leading “truth tellers”:
• Jim Dahle (The White Coat Investor) and his Bogleheads presentation on reasonable vs. unreasonable portfolios
• Dr. Bill Bernstein, and why staying disciplined may be investors’ greatest lifelong challenge

Along the way, Paul reviews 10-month, year-to-date performance for the Best-in-Class ETF portfolios—including the 10-fund, 4-fund, and 2-fund strategies—and explains why the surprising 2025 return patterns are completely normal.

Key topics include:

• Why some equity asset classes “disappoint” this year—and why that’s expected

• The resurgence of international value, small international, and emerging markets

• How Chris Pedersen’s 4-Fund Worldwide strategy kept pace with the 10-Fund

• The powerful role of non-traditional index funds (DFA & Avantis)

• Why small-cap value’s recent struggles shouldn’t discourage long-term investors

• How to access DFA-style factor premiums through today’s ETFs

• The importance of keeping an investing approach simple, reasonable, and durable

• Why staying the course—not forecasting—is the true key to long-term success

Paul also shares personal updates about moving back to Bainbridge Island and reflects on what it means to serve a community of dedicated DIY investors.

If you know someone who would benefit from this work, please share this episode. And don’t miss the links in the show notes—including Jim Dahle’s video, portfolio references, quilt charts, and upcoming AAII registration details.

Thank you for listening—and all the best to you and your family.

Paul Merriman welcomes back Chris Patterson, Director of Research, and Daryl Balls, Director of Analytics, for another thoughtful roundtable discussion. These three “underpaid volunteers” reflect on how far the Merriman Financial Education Foundation has come — and where it’s headed next. Together, they cover everything from new educational tools to a data-driven look at one of the most common investor questions: Has small-cap value lost its punch?

The episode revisits this hot topic with evidence from decades of historical data, including several key Merriman Tables that illustrate why small-cap value (SCV) continues to deserve a place in long-term portfolios.

📊 Quilt Chart: Year-by-Year Performance of the Major Asset Classes
Created by Daryl Balls, this visual “quilt” shows how the four major U.S. equity asset classes — large-cap blend, large-cap value, small-cap blend, and small-cap value — have rotated in and out of favor since 1928. The randomness of short-term returns underscores the importance of diversification and patience. Despite long stretches of average performance, small-cap value’s cumulative results remain powerful.
➡️ View the Quilt Chart on PaulMerriman.com

📈 Table G-1b: Fine-Tuning Table — S&P 500 vs U.S. SCV Equity Portfolio Outperformance
Prepared by Daryl Balls, this 54-year comparison (1970–2024) demonstrates how small-cap value has consistently outperformed the S&P 500 over time. The two rightmost columns — highlighting rolling 15-year and 20-year outperformance — are especially compelling, showing that even after periods of apparent weakness, SCV regains its strength.
➡️ Explore Table G-1b: Fine-Tuning S&P vs SCV

📉 Tables B1, H2, H2A, and D1.4: Core Bootcamp Comparisons
From the Foundation’s Sound Investing Bootcamp series, these tables reveal how diversified equity portfolios have performed versus the S&P 500, both in accumulation and distribution phases. They help investors see that broad diversification — especially adding small-cap value — historically improves returns and risk-adjusted outcomes.

• Table B1: All-Equity Portfolio Returns by Asset Class (1928–2024)
• Table H2: 60/40 Portfolio Distribution Outcomes (1970–2024)
• Table H2A: All-Equity Portfolio Distribution Outcomes (1970–2024)
• Table D1.4: Historical Equity Premiums and Drawdowns

➡️ See all Bootcamp Tables

Paul, Chris, and Daryl explain that small-cap value premiums come in bursts — often following years of average performance. As Paul notes, SCV has had multiple 15- to 20-year stretches of breaking even with the S&P 500, followed by explosive 3- to 10-year “catch-up” periods that deliver outsized gains. The data in Table G-1b makes this clear: over 54 years, SCV continues to deliver a meaningful performance edge.

As Daryl reminds listeners, “those two columns on the right are powerful.” They show that long-term investors who remain patient — and maintain a disciplined exposure to small-cap value — have been well rewarded.

• Patience is the premium. Factor returns are unpredictable year to year, but history rewards persistence.
• Diversification is defense. Combining S&P 500 with small-cap value reduces regret during both booms and busts.
• Data over drama. The Foundation’s free tools, calculators, and tables are designed to help you make rational, informed choices for the long term.

🎧 Listen now on Spotify or YouTube to hear Paul, Chris, and Daryl discuss new tools like the Two Funds for Life Calculator, updates to the Best-in-Class ETF Recommendations, and their vision for the next generation of financial education.

Featured Tables and ChartsWhy Small-Cap Value Still Packs a PunchEducational Takeaways